Case Study: How I Bought My First Apartment Building [With Pictures!]
After years of acquiring and investing in single family rental homes, I recently purchased my first apartment building. Here is the breakdown of my first apartment building purchase to provide some valuable insight if you decide to make the leap into multifamily investing.
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My partner and I wanted to expand and grow our portfolio. We decided to branch out into multifamily. Our criteria was 40-unit buildings and above because, in our eyes, it takes the same amount of work to acquire one large apartment building as multiple duplexes or triplexes, etc. Plus, with the right infrastructure, it’s easier to manage one building, in a single location, versus units spread out in different areas.
There’s this pocket near the south side of downtown that has been pretty run down for quite a while. Everything around the location is prime. I’ve driven it over the past couple of years and kept my eyes on the two apartment buildings right across the street from each other.
At the time, one of the buildings had been vacant for quite a while. The other was a pretty run down “mom and pop”-owned building. Prior to this deal, we established local relationships with brokers and contacted sellers directly to find off-market deals. I happened to notice more recent renovations on the vacant building. Then I drove by the other one and noticed it was in distressed condition, as mentioned.
I went to my laptop to research and noticed it was previously listed at $1.4M on LoopNet, but got taken down. I contacted the seller directly by tracing his information from the public records, which I found through a simple Google search. He had recently sold a couple of his other properties and was looking to transition from being an active landlord to a full-time debt collector. That’s a good sign of a motivated seller! We spoke briefly, during which he stated that a previous deal fell through and recommended we speak with his sister, who was brokering it. He was also adamant that “if you’re not willing to put $50k down for earnest money, don’t bother with proceeding with the deal.”
After speaking with the broker, I asked for the rent roll and T-12. The T-12 breaks down the actual income and expenses of the building over the last 12 months.
We determined that in order to make this deal work, we needed to be near $1M for the purchase. Based upon the T-12, our cap rate was 7% at the current 50% occupancy rate, but when repositioned, we’d be closer to 10-11% cap rate.
After determining what we would pay, we shot the price over to broker. We started low. I believe it was just $600k. The seller countered at a much higher figure. During this time, my partner and I reached out to a few investors—including Gino Barbaro and Matt Faircloth, as well as other local people in the multifamily space—to get extra sets of eyes on the deal. With our infrastructure, the numbers would work at a significantly higher price. Our mistake was underwriting the deal too conservatively. We came up on our offer to $900k and went under contract. The seller was interested in carrying back a portion of the purchase price, which was good for us. We only needed to put down $200k.
During our inspection, we had the inspector walk ALL of the units, which was good but unnecessary in my opinion. That was our second mistake. It is a must for the investor to walk all the units, but not necessarily the inspector. The report was 80+ pages and repetitive when it came to detailing each unit. It was good to learn this lesson, though. In conclusion, the report showed the building needed work, but nothing too alarming. The biggest thing was configuring out the decks and balconies so they would sustain themselves and guiding water from the property.
Nobody wants to labeled as a “re-trader,” but in our scenario, once we ran the numbers, we were cash flow negative. The first couple of months were at the current interest rate to seller, and our term of one year was too short. Jake and Gino recommended we get that extended. They also threw out the idea of interest only. We posed the terms to the seller and ended up settling on 3% the first year, 5% the second, and 7% third year with a 3-year balloon payment on a 25-year amortization.
We wanted to give the place an entirely different look and feel. We started off by changing the signage and name after acquiring the property. We plan to address the exterior of the property first, along with upgrading and renovating other aspects of the property. Everything else we have quoted in the scope of work here. Our in-house GC helped with that.
We decided to outsource our laundry to Coinmach with a 90% us/10% them, split after they get the first $14 per machine. The laundry brings in approximately $400 per month. We’re not looking to make too much money on this. It’s essentially something nice we want to provide for our tenants. We’re still considering some type of cable provider as well.
Despite starting the deal in October and not closing until April, it was a great experience. It’s always exciting to dig up great deals—and it’s even better when they close. We learned a lot, including how to save on inspections, the best ways to structure seller financing deals, and the great value to be found in working with others on BiggerPockets.
Have you tackled your first multifamily deal yet? Any questions about this property?
Let me know with a comment!